Relevant market

Based on Wikipedia: Relevant market

What's Worth Monopolizing?

Here's a deceptively simple question that has decided the fate of billion-dollar mergers: If a company could somehow control an entire market, would it actually be able to raise prices?

This isn't a hypothetical puzzle for economics students. It's the central question that antitrust regulators and judges wrestle with every time they evaluate whether a merger might harm consumers. And the answer hinges entirely on how you draw the boundaries of something called the "relevant market."

Get the boundary wrong, and you might block a merger that would have benefited consumers. Or worse, approve one that creates a genuine monopoly.

The Boundary Problem

Think about what happens when you're thirsty on a hot day. You might buy a Coca-Cola. But if Coke suddenly cost ten dollars, you'd probably grab a Pepsi instead. Or a lemonade. Or just water from the fountain.

Now here's where it gets interesting: Are all those drinks in the same market?

If you're Coca-Cola and you want to argue that you don't have monopoly power, you'd love to include every possible beverage—bottled water, juice, sports drinks, coffee, tea, maybe even soup—in your market definition. The more products in the market, the smaller your share looks.

But if you're a regulator worried about consumer welfare, you might argue that cola drinks are their own distinct market. After all, when someone craves a cola, they usually want a cola, not a smoothie.

This is the boundary problem, and it matters enormously.

Two Dimensions of the Market

A relevant market isn't just about products. It has two dimensions that intersect like coordinates on a map.

The first dimension is the product market. This includes all the products or services that consumers view as interchangeable. The key factors are characteristics, price, and intended use. A luxury sports car and an economy sedan both provide transportation, but most consumers wouldn't consider them substitutes—they serve different purposes for different budgets.

The second dimension is the geographic market. Competition doesn't exist in a vacuum; it happens in specific places. A bakery in Portland, Maine, isn't really competing with a bakery in Portland, Oregon. The geographic market encompasses the area where companies actually compete and where competitive conditions are reasonably similar.

The relevant market sits at the intersection of these two dimensions. It's the specific arena where companies fight for customers.

The Economist's Guiding Principle

In 1995, two economists named Simon Bishop and M. Darcey offered an elegantly simple way to think about relevant markets. They argued that a relevant market is, essentially, something worth monopolizing.

What does that mean?

Imagine you could wave a magic wand and gain complete control over a set of products. If you could then profitably raise prices to monopoly levels—without customers fleeing to alternatives outside your control—then congratulations, you've identified a relevant market.

But if customers would simply switch to substitute products you don't control, your monopoly would be worthless. You'd have to expand your definition to include those substitutes too.

This framing transforms an abstract legal concept into something concrete: Does controlling this set of products actually give you meaningful power over consumers?

The Five Percent Test

Economists needed a practical way to test whether products belong in the same market. Their answer was the SSNIP test, which stands for Small but Significant Non-transitory Increase in Price. It's pronounced "snip," and it works like this:

Suppose a hypothetical monopolist controlled all the products you're considering as a single market. Could they profitably raise prices by five to ten percent for a sustained period?

If yes, you've found your relevant market. The products are worth monopolizing.

If no—because consumers would switch to substitutes outside the proposed market—then the market definition is too narrow. You need to expand it to include whatever products consumers would flee to.

The test sounds straightforward, but applying it requires sophisticated economic analysis. You need to understand the price elasticity of demand—how sensitive consumers are to price changes. And you need to identify the marginal consumers, the ones who are on the fence and most likely to switch.

A Subtle but Crucial Point

Here's something that trips up many people: When testing market boundaries, you don't look at the average consumer. You look at the marginal consumer.

Suppose ninety percent of cola drinkers are die-hard loyalists who would never switch to another beverage regardless of price. That doesn't mean cola is its own market. What matters is whether the remaining ten percent would switch. If enough of them would defect to juice or water when prices rise, then raising prices becomes unprofitable—and those alternatives should be included in the relevant market.

A small but significant group of switchers—typically five to ten percent—is enough to discipline a would-be monopolist.

When Price Equals Zero

The SSNIP test worked beautifully for decades. Then came the digital economy, and it ran into a wall.

How do you test a five percent price increase when the product is free?

Facebook doesn't charge users money. Neither does Google Search or Instagram or TikTok. These platforms compete for attention and data, not dollars. A five percent increase on zero is still zero.

This creates a genuine puzzle for antitrust enforcers. The traditional tools don't work. Regulators and economists have had to develop new techniques—some involving machine learning—to define relevant markets in the digital world. These methods might look at quality degradation instead of price increases, or analyze how users allocate their attention across platforms.

The 2024 revision of the European Commission's Market Definition Notice explicitly addresses these challenges, acknowledging that digital markets and innovative industries require new approaches.

Supply-Side Substitution: The Producer's Response

So far, we've focused on how consumers respond to price changes. But there's another force that can constrain a monopolist: other producers.

Imagine a company makes wooden chairs. If they tried to monopolize the wooden chair market and jack up prices, other furniture manufacturers might pivot their production lines to start making wooden chairs too. They already have the wood-working equipment and the skilled labor. Switching to chairs wouldn't require massive new investments.

This is supply-side substitution, and it expands the relevant market to include potential competitors, not just current ones.

If producers can quickly and cheaply switch their facilities to making the monopolized product, they create competitive pressure even before they actually enter the market. The mere threat of their entry keeps prices in check.

Drawing Geographic Boundaries

Products don't exist in a vacuum. They exist in places. And the geographic dimension of market definition can be just as contentious as the product dimension.

Several factors determine where to draw geographic boundaries. Transport costs matter enormously. If it costs more to ship cement across the country than the cement itself is worth, then cement markets are inherently local. High transport costs can make trade between regions economically infeasible, creating natural geographic boundaries.

Consumer preferences matter too. Some products have strong regional or national character. A French consumer might insist on French cheese in a way that an American consumer wouldn't. Entry barriers vary by region—regulatory requirements, distribution networks, and brand recognition all differ across geographic areas.

The practical test is the same as for products: Would a hypothetical monopolist in this geographic area be able to profitably raise prices? If consumers can easily buy from suppliers in neighboring regions, the geographic market expands to include those regions.

The Transatlantic Divide

Both the United States and the European Union have developed sophisticated frameworks for market definition, but they've taken somewhat different paths.

In the United States, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) jointly publish merger guidelines that specify methods for analyzing markets. These guidelines have been revised multiple times since 1980, with each revision nudging courts toward more explicitly economic analysis. The American approach tends to be more adversarial—the agencies must convince courts to adopt their market definitions in contested cases.

The European Commission took a more systematic approach, adopting a Market Definition Notice in 1997 that provided general guidelines across all areas of competition law. This notice was comprehensively revised in 2024 after extensive evidence gathering and public consultation. The European approach is somewhat more administrative—the Commission has broader authority to define markets without the same level of judicial second-guessing.

Both systems grapple with the same fundamental questions. They just do so through different institutional mechanisms.

Why This Matters: The Meta Case

Market definition isn't an abstract academic exercise. It determines the outcomes of cases worth billions of dollars.

When the FTC challenged Meta's acquisitions of Instagram and WhatsApp, the entire case turned on how to define the relevant market. Was Meta competing in "personal social networking services"—a narrow market where it might appear dominant? Or was it competing in a broader market for digital attention that includes TikTok, YouTube, Snapchat, messaging apps, and countless other ways people spend time online?

If the market is narrow, Meta looks like a monopolist that eliminated nascent competitors by acquiring them. If the market is broad, Meta looks like one player among many in a vibrant, competitive landscape.

The boundary you draw determines the story you tell. And the story you tell determines whether a merger stands or falls.

The Paradox of Market Definition

There's something almost philosophical about the relevant market concept. It asks us to imagine counterfactual worlds—What if this company had monopoly control? What would consumers and producers do?—and then make concrete decisions based on those imagined scenarios.

The market isn't out there waiting to be discovered like a continent on a map. It's constructed through analysis and argument. Reasonable people can disagree about where to draw the lines, and small differences in line-drawing can lead to dramatically different outcomes.

This explains why market definition battles are often the fiercest part of antitrust litigation. Both sides understand that whoever wins the market definition argument has usually won the case.

Beyond Products: Labor Markets

One more dimension deserves mention: The relevant market concept applies to labor markets too.

When companies merge, they don't just combine their power over consumers. They also combine their power over workers. If two of the largest employers in a region merge, workers may have fewer options for employment. Wages could stagnate. Working conditions could deteriorate.

Antitrust authorities increasingly scrutinize mergers for their effects on labor market competition, not just product market competition. The same analytical framework applies: What products compete for workers? What's the geographic area in which workers realistically seek employment?

A software engineer in San Francisco might compete for jobs globally—remote work has expanded geographic labor markets for some professions. But a warehouse worker or a nurse competes in a much more local market. Draw the boundaries wrong, and you might miss a merger that creates monopsony power over workers even if it doesn't harm consumers.

The Art and Science of Boundaries

Defining relevant markets requires both rigorous economic analysis and careful judgment. The SSNIP test provides structure, but it doesn't eliminate the need for human decision-making about what evidence to credit and how to interpret ambiguous results.

Markets are not natural categories carved into the fabric of the universe. They're useful abstractions that help us think about competition. The question isn't whether we've found the "true" market—it's whether our market definition helps us make good decisions about mergers and monopolies.

A market worth monopolizing. It's an elegant concept, hiding immense complexity beneath a simple surface. Every antitrust case is, in some sense, an argument about boundaries—about what's in and what's out, about what competes with what, about where one market ends and another begins.

Get the boundaries right, and competition flourishes. Get them wrong, and you either block beneficial mergers or permit harmful ones. The stakes couldn't be higher.